Colombian Holding Company Regime (CHC)

One of the greatest advances in tax and corporate matters in recent years is the Colombian Holding Companies Regime ("CHC Regime"), introduced in the draft Financing Law recently submitted to Congress for study by the National Government. This regime, if approved, would turn Colombia into a global investment platform, such as Luxembourg, Holland and Spain are today, thus generating great value for the country.

Colombian companies whose main purpose is "the holding of securities, investment or holding of shares or participations from abroad and/or the administration of such investments" will be eligible for the CHC regime, provided that they comply with two conditions: (i) participate directly or indirectly in the capital of each foreign company or entity for a minimum of 12 months, and (ii) have the human (minimum 3 employees) and material resources for the full realization of the corporate purpose (a physical address in Colombia where it is demonstrated that decisions are adopted). Once the entities prove that they comply with the requirements of temporality and materiality of the CHC regime, they may communicate it to the Dian through the forms established for such purpose, taking effect from the fiscal year in which the communication is filed.

To be covered by this regime brings significant tax benefits in the receipt of dividends from abroad, as well as in the transfer of the participation of a CHC in entities not resident in Colombia. Regarding the first point, dividends distributed by a foreign entity to a CHC will be exempt from income tax and will be declared capital exempt income. If the CHC distributes dividends to a Colombian resident, this distribution will be taxed at the general rate, but will grant a discount for taxes paid abroad. In the event that the dividend is distributed by CHC to a shareholder who is not a Colombian resident, it will be understood as foreign source income. Likewise, the distribution of the premium on placement of shares will have the same treatment as ordinary dividends. The above will not apply when the recipient of the income distributed by a CHC is a resident of a non-cooperating jurisdiction of low or no taxation and/or of a special tax regime.

Regarding the second point, the income derived from the sale or transfer of the participation of a CHC in entities not resident in Colombia will be exempt from income tax and must be declared as exempt occasional gains.

Likewise, income derived from the sale or transfer of shares in a CHC (unless its shareholders are non-residents, in which case it will be understood that it is foreign source income) will be exempt except for the value corresponding to the profits obtained from activities carried out in Colombia.

Finally, the regulation establishes the obligations of information maintenance and coordination with other regimes, clarifying, in this last point, important matters such as that the dividends received by the investments in foreign entities and covered by the CHC regime, will not be subject to the industry and commerce tax.